India: In Counsel - Five Things To Know About M&A Transactions In India

Since the introduction of a new governmental policy in 1991 to
bring in reforms to encourage investment in India, the number of
cross-border mergers and acquisitions has increased. However, the
Indian M&A sector remains highly regulated and even where a
transaction may appear to be simple, additional approvals and
consents may be required which will add time and cost to the
transaction. This article looks at the five key things you should
know about M&A transactions in India.

Regulation

M&A activity in India is heavily regulated at all levels,
including internal restructurings. Principal regulators include the
Securities and Exchange Board of India, the Reserve Bank of India
(RBI), the Foreign Investment Promotion Board and
the Competition Commission of India.

M&A transactions are principally governed by the Companies
Act 2013; the Foreign Investment Policy of the government of India
along with press notes and circulars issued by the Department of
Investment Policy and Promotion; the Foreign Exchange Management
Act 1999 and regulations made thereunder, including circulars and
notifications issued by the RBI from time to time; and the
Securities and Exchange Board of India Act 1992 and regulations
made thereunder.

Foreign direct investment is prohibited in the following areas
or activities:

activities and activities/sectors that are not open to the
private sector, including atomic energy and railway transport
(other than mass rapid transport systems); and

Nidhi company business (a form of a non-banking finance company
in India).

Foreign direct investment is permitted in all other sectors,
subject to certain prescribed limits on investment in certain
areas.

No matter how small the transaction is, it is important to
ensure your transaction does not fall foul of any of the above
regulations. It is sometimes possible to obtain approval from the
relevant Indian regulator to proceed with the transaction but this
can be a timely and costly exercise and must be considered at the
outset.

Authorised dealer bank

The RBI has published a list of banks that are authorised to
deal in foreign exchange transactions in India. The authorised
dealer bank may be required to file certain forms with the
Registrar of Companies in India or approve certain aspects of the
transaction. Accordingly, it is important to keep the authorised
dealer bank abreast of the key details of the transaction at all
times and to immediately notify the authorised bank of any changes
to the structure of the transaction.

Escrow accounts

Monies may be held in escrow for a number of reasons. Monies are
often held in escrow where a transaction falls foul of one of the
regulations and the parties are awaiting approval from the relevant
Indian regulator to proceed with the transaction. It takes time to
set up an escrow account and agree the terms with the escrow agent
so make sure you begin this process early on. The terms of the
escrow largely depend on the type of transaction and the reason for
the creation of the escrow, but Indian escrow agents are often not
permitted to pay interest on the escrow account and there is a
limit, usually 6 months, on how long sums may be retained in an
escrow account.

Corporate governance

As previously reported (see our February 2013 update), last year
the Indian government enacted the Companies Act 2013 which seeks to
introduce new corporate governance measures to bring the internal
structure of Indian companies in line with their foreign
counterparts. The changes have not yet been fully implemented and a
number of regulations are yet to be drafted in order to give full
effect to the provisions of the Companies Act 2013. Until such time
as the legislation has been fully implemented, it is important to
ensure that internal checks and balances are in place even though
they may not be compulsory at this stage. It will save considerable
time and cost at a later stage.

Tax

A body corporate resident in India will be taxed in India. A
body corporate is resident in India in any year for tax purposes if
it is registered in India or if the control and management of its
affairs is wholly situated in India.

A non-resident business is taxed in India on the amount of
income accruing or arising (or deemed to accrue or arise) or
received (or deemed to be received) from India. India has entered
into tax treaties with over 75 countries to avoid double taxation,
including the US, UK, China, Japan, Germany, Singapore and
Mauritius.

Some of the taxes to be aware of when doing business in India
include:

service tax;

customs duty is imposed on the import and export of goods in
India;

excise duty;

employers must withhold income tax at the applicable rate from
the salary paid to an employee;

minimum alternative tax or alternative minimum tax –
where the tax paid in India by a company, partnership or LLP is
below a certain percentage, an additional tax will be payable on
the profits of such an entity; and

stamp duty (which may be payable prior to execution of the
share purchase agreement).

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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